The stock market has had an impressive start in 2024, with last year’s rally driving it forward. Confidence in the U.S. economy has strengthened due to positive economic data, leading to expectations of a soft landing and future interest-rate cuts. The Dow Jones Industrial Average and S&P 500 are reaching record highs, while the Nasdaq Composite is close to its 2021 peak.
Despite these positive developments, investors should approach the market with caution, particularly when it comes to tech stocks. Barry Bannister, Stifel’s Chief Equity Strategist, warns that the S&P 500 may struggle to make significant progress in the first half of 2024. He believes that large-cap growth stocks, which have been the driving force behind the S&P 500’s valuation, are currently overvalued.
Bannister points out potential threats to the market rally, arguing that the remarkable gains made by tech stocks cannot be sustained indefinitely. This echoes lessons learned during the dot-com bubble of the late 1990s. Moreover, if inflation remains high, interest rates could stay elevated for an extended period. This would adversely impact the tech sector as higher rates diminish future earnings expectations.
However, there is good news for investors. They do not solely have to rely on tech stocks and the widely popular “Magnificent Seven” companies consisting of Meta Platforms, Apple, Amazon, and others. Bannister suggests that now might be a suitable time to consider investing in cyclical value stocks. These sectors include financials, industrials, materials, real estate, and energy. Bannister believes these sectors are currently oversold and present a favorable entry point, discounting a potential recession that he deems unlikely.
In summary, while the stock market’s rally continues into 2024, investors should exercise caution and consider alternatives to the tech sector. Exploring opportunities in cyclical value stocks appears to be a prudent move, as sectors such as financials, industrials, materials, real estate, and energy show signs of being undervalued.
Economic Outlook Favors Value Stocks as Inflation Eases
As the economy strengthens and inflation gradually subsides, cyclical value stocks are expected to outperform growth stocks. This optimistic stance is shared by analysts at Stifel, who endorse companies such as Visa, Mastercard, Wells Fargo, and Fiserv within the financial sector as beneficiaries of economic growth.
Furthermore, sectors like energy and industrials, which are more sensitive to inflation, are poised for growth as inflation continues to ease. Stifel analysts recommend stocks like Boeing, CSX, Schlumberger, EOG Resources, and FedEx in these sectors.
However, concerns about expensive valuations in the equity markets persist. J.P. Morgan recently highlighted the current expensive valuation territory of equity markets. Consequently, investors searching for bargains are diversifying beyond the tech sector.
Some strategists believe that small-cap stocks may have their moment in 2024. Solita Marcelli, UBS Global Wealth Management’s Chief Investment Officer of the Americas, emphasizes the potential for small-caps to outperform the broader market in both a soft landing scenario and a favorable “Goldilocks” scenario.
The recent tech sector selloff after earnings reports serves as a reminder of its vulnerabilities. This demonstrates that investors may not always stick with the sector through thick and thin. If the tech sector encounters further challenges, cheaper alternative options may become more appealing.